CORPORATE WINDOW: Power sector at a crossroads

Pakistan’s energy sector stands at a crossroads, crippled by a circular debt of almost Rs6 trillion as of now — a crisis threatening the country’s economic and energy security. Circular debt is the amount that the power purchaser cannot recover from electricity distribution companies (Discos) and subsequently fails to pay to the independent power producers (IPPs). Although the circular debt emerged in 2006, its seeds were sown in the 1990s when Pakistan entered into short-sighted agreement with IPPs. The introduction of IPPs and circular debt is deeply intertwined — policymakers agreed to the conditions of the IPPs without evaluating their long-term implications for the power sector. Through power purchase agreements (PPA), IPPs were incentivised with guaranteed returns and capacity payments, regardless of electricity usage.